Yes, we’ve avoided recession – but don’t crack open the champagne just yet

The good news is true: we’ve officially avoided a recession.

The economy grew (a little) in the last three months of 2024, which is ahead of what most forecasters, including the Bank of England, expected. But I wouldn’t crack open the champagne, just yet – when it comes to growth, Britain could be facing a false dawn.

To qualify for recession you have to have experienced two consecutive three-month quarters in negative territory. The third quarter of 2024 delivered zero (subject to revision, so it could still go down). But the fourth spluttered its way into positive territory, with growth of 0.1 per cent. UK plc also grew in 2024 as a whole, narrowly, by 0.9 per cent.

However, in the guts of the figures, there really isn’t much to celebrate.

Let’s start with the uncomfortable fact that the positive result was down to the fact that the population grew. This meant that more people were contributing to the numbers, pushing them into the positive. However, when you consider GDP per head, all of us produced a little less. It fell by 0.1 per cent.

That is a poor result and there is no hiding from that. Nor was it the only shark lurking in the numbers – it wasn’t even the biggest. Credit to the consultancy Capital Economics for identifying the big nasty: business investment declined by 3.2 per cent in the fourth quarter when compared to the third. That is the first fall in more than a year and bodes ill for the future.

The blame falls squarely on the shoulders of Chancellor Rachel Reeves for thinking that hiking business taxes was the easiest way out of the fiscal hole she found herself in when she entered office – one that the electorate wouldn’t notice. Something that didn’t involve “taxing working people” except it did. Because she taxed jobs, and hiked employers’ costs.

Businesses responded by cutting back on staff – they’re still at it – and by reducing investment to the economy’s detriment.

Reeves was absolutely right to say that the UK has been starved of growth and that the way to improve it was to boost investment. The latter is something I’ve been banging on about for years. The chancellor is planning to borrow heavily to fund more of it from the public sector. Borrowing to invest is good borrowing because if you do it well – the “if” matters a lot, but we’ll park that for now – you’ll get a return and everyone benefits.

But with her decision to increase business taxes by increasing employer national insurance contributions, she has cut off her nose to spite her face. To really get the economy humming, you need both the public and the private sectors to play – and the private sector has picked up its ball and taken it home. Confidence is at rock bottom.

Forecasters still think this could turn around later in the year when the taps are turned on and public money starts to flow into the economy. As I wrote yesterday, the National Institute of Economic and Social Research (NIESR) thinks UK plc could scoot into bronze medal position in the G7 league table with growth of 1.5 per cent this year. It thinks the Bank of England’s 0.75 per cent forecast is too pessimistic.

However, for that to happen we’re going to need to see a lot of action in the second part of this year. If you’ve been paying attention to the most recent forward-looking indicators, you’ll know that the UK economy is struggling to escape the quicksand that Reeves’ fateful decision pushed it into.

So while we’ve avoided a recession, we’re stuck with its ugly cousin: stagnation. You could hardly fail to notice the 0.8 per cent contraction in manufacturing. That industrial policy we keep hearing about needs to be prepared to do some heavy lifting to pull it out of its current trough.

Could revisions to the figures down the line ultimately show that there was a recession after all? Probably not. You’d require the Q3 number to be pushed into the red and Q4 to be revised significantly downwards. Replacing growth of 0.1 per cent with a contraction of 0.1 per cent requires a very substantial move when you’re looking at a big economy.

But that’s like a consoling pat on the shoulder from your dad after you finished in fourth place at the Olympics. Reeves entered No 11 Downing Street in an extremely difficult position. Pain was the inevitable result. The trouble is, her means of delivering that looks worse by the day.

The chancellor admitted she was not satisfied with the numbers. Nor should she be. But to turn things around and drag UK plc onto more solid ground, she badly needs to find a way of boosting business confidence.